Global Courant
Sequoia Capital, one of Silicon Valley’s oldest and most successful venture capital funds, is splitting into three independent regional companies to simplify management and reduce political risk.
The company’s operations in the US and Europe will continue to use the Sequoia Capital name. The operations in India and Southeast Asia have been merged and renamed Peak XV Partners. Peak XV was the original designation British surveyors gave to Mount Everest. The activities in China will be called HongShan, which means Sequoia.
On June 6, Sequoia announced, “It has become increasingly complex to run a decentralized global investment firm… As a result, using centralized back-office functions has become more of a hindrance than an advantage… We will move to fully independent partnerships and become separate companies with separate brands by March 31, 2024.”
The company’s statement, which also mentioned “market confusion from the Sequoia shared brand” and “portfolio conflicts,” was signed by Roelof Botha, managing partner of Sequoia Capital; Shailendra Singh, CEO of Peak XV Partners; and Neil Shen, Founder and Managing Partner of Sequoia China.
Not mentioned in the statement, but almost certainly a factor in the division’s decision, is the widespread expectation that the Biden administration will soon issue new, tighter restrictions on U.S. investment in China. This is a concern for both US and Chinese investors and Sequoia has reportedly hired consultants to advise it on the matter.
What types of investments might be restricted is not yet known, but media reports list the usual suspects: semiconductors, quantum computing and artificial intelligence (AI).
US Treasury Secretary Janet Yellen has said any new restrictions are “narrow in scope and target technologies with clear national security implications”. But what Treasury considers “barely” could affect a wide variety of high-tech venture capital investments.
US Treasury Secretary Janet Yellen sees new restrictions on investment in China. Photo: Agencies
In a report published in early May, the Peterson Institute for International Economics wrote that:
“The US government must finally decide whether its primary concern is the effects of capital or transfer of knowledge/technology. If it is capital, the impact on China will be small. The venture capital sector in China managed about $280 billion at the end of 2019, compared to $403 billion in the US. A recent report from the Center for Security and Emerging Technology found that only 37% of fundraising rounds by value for Chinese AI companies included a US investor. It is clear that Chinese AI companies and presumably tech startups in other sectors are not dependent on US capital.”
The Peterson Institute is not alone in thinking that new investment restrictions could be ineffective. On May 25, Patrick McHenry, chairman of the U.S. House of Representatives Financial Services Committee, sent Secretary Yellen a highly critical letter asking for detailed evidence that Treasury would achieve its alleged goals. In part it reads:
Dear Secretary Yellen,
I am writing with regard to the executive order proposed by the administration on outward investment, the imminent release of which has been circulating since last year.
According to government briefings, the Treasury Department may turn CFIUS into a commission on foreign investment in the United States and China, prohibiting deals in certain Chinese technology sectors and requiring disclosures to investors in others. As we prepare for your testimony before the committee, I would like your feedback on the following matters.
Last year, China posted a current account surplus of $417.5 billion, its highest level since 2008. The last time a government attempted to limit funding to a country with a large current account surplus (Russia), in 2014, that failed. Do the Treasury Department and government really believe that investment restrictions will be in place this time – especially against a country in surplus that has $3 trillion in reserves?
… Given the Treasury Department’s long-standing principle that coercive measures should achieve clear objectives, it is unclear why the government now wants to repeat the same policy in China but expects different results.
The government further claims that early US investment in Chinese companies may require the declaration of a national emergency. However, U.S. venture capital deals in China are down 87 percent since 2018.1 At their peak, these investments were concentrated in later-stage companies. In addition, U.S. venture capital firms typically acquire control, substantial decision-making rights, board seats, or material non-public technical information when they invest.
As your colleagues in the Office of Investment Security know, these represent potential national security risks to the target country – China in this case. It is inexplicable that the government hopes to save China from these risks before Beijing can. At a time when the Chinese Communist Party is already cracking down on Western businesses and corporate intelligence, the government should reject an EO that furthers Beijing’s goals.
And that’s not all. The Peterson Institute report concludes with this comment: “Whatever Washington decides, its rules could change the relationship of the U.S. government with its businesses, investors, and the world.” Of course that is already happening.
Sequoia Capital was founded in 1972 by Don Valentine, “the granddaddy of Silicon Valley venture capital.” It was an early investor in Apple Computer, Atari, LSI Logic, Oracle, Cisco, Electronic Arts, Google, and Nvidia. Starting out as a $3 million fund, it reportedly has about $85 billion under management by 2022.
Sequoia entered China in 2005 and India in 2006. In China, where investments were made in Alibaba, ByteDance, Meituan and JD.com, among others, assets under management have risen to a whopping $56 billion. It is the largest venture capital firm in India with assets worth about $9 billion.
Sequoia had a financial hand in Alibaba’s success. Image: Agencies
This was achieved with what is considered unusually decentralized decision-making:
“Our founder-focused, local-first approach has been key to our success in every region…Sequoia China has made substantial investments in healthcare and traditional consumer sectors in addition to technology investments…Sequoia India has played a significant role in cultivating the startup ecosystem in India and SEA (Southeast Asia…Each entity is now a market leader.”
Once back office functions, infrastructure and profit sharing are completely separated, there will be three venture capital firms instead of one, two of which are based outside the US. An example has been set. Sequoia probably won’t be the only investment company to follow this path around US sanctions.
Follow this writer on Twitter: @ScottFo83517667
Similar:
Loading…
